The EFTA was established on 3 May 1960 as an alternative trade bloc for European states who were unable or unwilling to join the then European Economic Community (EEC) (which subsequently became the EU). The Stockholm Convention, establishing EFTA, was signed on 4 January 1960 in the Swedish capital by seven countries (known as the "outer seven"). Today only two founding members remain: Norway and Switzerland. The other five were Austria, Denmark, Portugal, Sweden and the United Kingdom. The initial Stockholm Convention was superseded by the Vaduz Convention, with the aim of providing a successful framework for continued expansion and liberalization of trade among the organisation's member states and with the rest of the world.

While the EFTA is not a customs union and member states have full rights to enter into bilateral third-country trade arrangements, it does have a co-ordinated trade policy.[1] As a result, its member states have jointly concluded free trade agreements with a number of other countries.[1] To participate in the EU's single market, Iceland, Liechtenstein and Norway are party to the Agreement on a European Economic Area (EEA), with compliance regulated by the EFTA Surveillance Authority and the EFTA Court. Switzerland instead has a set of bilateral agreements with the EU.

On 12 January 1960, the Treaty on European Free Trade Association was initialled in the Golden Hall of the Prince's Palace of Stockholm. This established the progressive elimination of customs duties on industrial products, but did not affect agricultural products or maritime trade.

The main difference between the early EEC and the EFTA was the absence of a common external customs tariff, and therefore each EFTA member was free to establish individual customs duties against, or individual free trade agreements with, non-EFTA countries. Despite this modest initiative, the financial results were excellent, as it stimulated an increase of foreign trade volume among its members from 3.5 to 8.2 billion US dollars between 1959 and 1967. This was rather less than the increase enjoyed by countries inside the EEC[citation needed].

The Portugal Fund was established in 1975 when Portugal was still a member of EFTA, to provide funding for the development and reconstruction of Portugal after the Carnation Revolution. When Portugal left EFTA in 1985 to join the EEC, the remaining EFTA members decided to continue the Portugal Fund, so that Portugal would continue to benefit from it. The Fund originally took the form of a low-interest loan from the EFTA member states to Portugal, to the value of $US 100 million. Repayment was originally to commence in 1988, but EFTA then decided to postpone the start of repayments until 1998. The Portugal Fund has now been dissolved by the Member States.

Finland became an associate member in 1961 and a full member in 1986, and Iceland joined in 1970. The United Kingdom and Denmark joined the EEC in 1973, and hence ceased to be EFTA members. Portugal also left EFTA for the European Community in 1986. Liechtenstein joined EFTA in 1991 (previously its interests had been represented by Switzerland). Austria, Sweden and Finland joined the EU in 1995 and thus ceased to be EFTA members.

In November 2012, after the Council of the European Union had called for an evaluation of the EU's relations with the sovereign European microstates of Andorra, Monaco and San Marino, which they described as "fragmented",[12] the European Commission published a report outlining options for their further integration into the EU.[13] Unlike Liechtenstein, which is a member of the EEA via the EFTA and the Schengen Agreement, relations with these three states are based on a collection of agreements covering specific issues. The report examined four alternatives to the current situation:

a Sectoral Approach with separate agreements with each state covering an entire policy area,

a comprehensive, multilateral Framework Association Agreement (FAA) with the three states,

EEA membership, and

EU membership.

The Commission argued that the sectoral approach did not address the major issues and was still needlessly complicated, while EU membership was dismissed in the near future because "the EU institutions are currently not adapted to the accession of such small-sized countries". The remaining options, EEA membership and a FAA with the states, were found to be viable and were recommended by the Commission. In response, the Council requested that negotiations with the three microstates on further integration continue, and that a report be prepared by the end of 2013 detailing the implications of the two viable alternatives and recommendations on how to proceed.[14]

As EEA membership is currently only open to EFTA or EU members, the consent of existing EFTA member states is required for the microstates to join the EEA without becoming members of the EU. In 2011, Jonas Gahr Støre, the then Foreign Minister of Norway which is an EFTA member state, said that EFTA/EEA membership for the microstates was not the appropriate mechanism for their integration into the internal market due to their different requirements from those of large countries such as Norway, and suggested that a simplified association would be better suited for them.[15]Espen Barth Eide, Støre's successor, responded to the Commission's report in late 2012 by questioning whether the microstates have sufficient administrative capabilities to meet the obligations of EEA membership. However, he stated that Norway was open to the possibility of EFTA membership for the microstates if they decide to submit an application, and that the country had not made a final decision on the matter.[16][17][18][19] Pascal Schafhauser, the Counsellor of the Liechtenstein Mission to the EU, said that Liechtenstein, another EFTA member state, was willing to discuss EEA membership for the microstates provided their joining did not impede the functioning of the organization. However, he suggested that the option direct membership in the EEA for the microstates, outside of both the EFTA and the EU, should be given consideration.[18] On 18 November 2013 the EU Commission concluded that "the participation of the small-sized countries in the EEA is not judged to be a viable option at present due to the political and institutional reasons", and that Association Agreements were a more feasible mechanism to integrate the microstates into the internal market.[20]

In mid-2005, representatives of the Faroe Islands raised the possibility of their territory joining the EFTA.[22] According to Article 56 of the EFTA Convention, only states may become members of the EFTA.[23] The Faroes are a constituent country of the Kingdom of Denmark, and not a sovereign state in their own right.[24] Consequently, they considered the possibility that the "Kingdom of Denmark in respect of the Faroes" could join the EFTA, though the Danish Government has stated that this mechanism would not allow the Faroes to become a separate member of the EEA because Denmark was already a party to the EEA Agreement.[24]

The Faroes already have an extensive bilateral free trade agreement with Iceland, known as the Hoyvík Agreement.

The United Kingdom was a co-founder of EFTA in 1960, but ceased to be a member upon joining the European Union. The country held a referendum in 2016 on withdrawing from the EU (popularly referred to as "Brexit"), resulting in a 51.9% vote in favour of withdrawing. While, the referendum result is only advisory, the UK Government has indicated it intends to follow the result. A 2013 research paper presented to the Parliament of the United Kingdom proposed a number of alternatives to EU membership which would continue to allow it access to the EU's internal market, including continuing EEA membership as an EFTA member state, or the Swiss model of a number of bilateral treaties covering the provisions of the single market.[25]

In the first meeting since the Brexit vote, EFTA reacted by saying both that they were open to a UK return and that Britain has many issues to work through. The president of Switzerland Johann Schneider-Ammann stated that its return would strengthen the association.[26] However, in August 2016 the Norwegian Government expressed reservations. Norway's European affairs minister, Elisabeth Vik Aspaker, told the Aftenposten newspaper: "It’s not certain that it would be a good idea to let a big country into this organisation. It would shift the balance, which is not necessarily in Norway’s interests".[27]

Given the United Kingdom's referendum vote in favour of leaving the European Union and Scotland's substantial majority in favour of remaining within the European Union, the Scottish Government has been looking into methods to retain access to or membership of the Single Market; consequently membership of the EFTA is another option the Scottish government is analysing. It is currently unclear if Scotland would have to become independent for such membership, or if it would require agreement with the United Kingdom Government and the Governments of the EFTA members.[28]

EFTA is governed by the EFTA Council and serviced by the EFTA Secretariat. In addition, in connection with the EEA Agreement of 1992, two other EFTA organisations were established, the EFTA Surveillance Authority and the EFTA Court.

The EFTA Council is the highest governing body of EFTA. The Council usually meets eight times a year at the ambassadorial level (heads of permanent delegations to EFTA) and twice a year at Ministerial level. In the Council meetings, the delegations consult with one another, negotiate and decide on policy issues regarding EFTA. Each Member State is represented and has one vote, though decisions are usually reached through consensus.

The Council discusses substantive matters, especially relating to the development of EFTA relations with third countries and the management of free trade agreements, and keeps under general review relations with the EU third-country policy and administration. It has a broad mandate to consider possible policies to promote the overall objectives of the Association and to facilitate the development of links with other states, unions of states or international organisations. The Council also manages relations between the EFTA States under the EFTA Convention. Questions relating to the EEA are dealt with by the Standing Committee in Brussels.

The day-to-day running of the Secretariat is headed by the Secretary-General, Kristinn F. Árnason, who is assisted by two Deputy Secretaries-General, one based in Geneva and the other in Brussels. The three posts are shared between the Member States. The division of the Secretariat reflects the division of EFTA’s activities. The Secretariat employs approximately 100 staff members, of whom a third are based in Geneva and two thirds in Brussels and Luxembourg.

The Headquarters in Geneva deals with the management and negotiation of free trade agreements with non-EU countries, and provide support to the EFTA Council.

In Brussels, the Secretariat provides support for the management of the EEA Agreement and assists the Member States in the preparation of new legislation for integration into the EEA Agreement. The Secretariat also assists the Member States in the elaboration of input to EU decision making.

The two duty stations work together closely to implement the Vaduz Convention’s stipulations on the intra-EFTA Free Trade Area.

The EFTA Statistical Office in Luxembourg contributes to the development of a broad and integrated European Statistical System. The EFTA Statistical Office (ESO) is located in the premises of Eurostat, the Statistical Office of the European Union, in Luxembourg, and functions as a liaison office between Eurostat and the EFTA National Statistical Institutes. ESO's main objective is to promote the full inclusion of the EFTA States in the European Statistical System, thus providing harmonised and comparable statistics to support the general cooperation process between EFTA and the EU within and outside the EEA Agreement. The cooperation also entails technical cooperation programmes with third countries and training of European statisticians.

A Joint Committee consisting of the EEA States plus the European Commission (representing the EU) has the function of extending relevant EU law to the non EU members. An EEA Council meets twice yearly to govern the overall relationship between the EEA members.

The original plan for the EEA lacked the EFTA Court or the EFTA Surveillance Authority, the European Court of Justice and the European Commission were to exercise those roles. However, during the negotiations for the EEA agreement, the European Court of Justice informed the Council of the European Union by way of letter that they considered that giving the EU institutions powers with respect to non-EU member states would be a violation of the treaties, and therefore the current arrangement was developed instead.

The EEA and Norway Grants are the financial contributions of Iceland, Liechtenstein and Norway to reduce social and economic disparities in Europe. They were established in conjunction with the 2004 enlargement of the European Economic Area (EEA), which brought together the EU, Iceland, Liechtenstein and Norway in the Internal Market. In the period from 2004 to 2009, €1.3 billion of project funding was made available for project funding in the 15 beneficiary states in Central and Southern Europe. The EEA and Norway Grants are administered by the Financial Mechanism Office, which is affiliated to the EFTA Secretariat in Brussels.

The EFTA Secretariat is headquartered in Geneva, Switzerland, but also has duty stations in Brussels, Belgium and Luxembourg City, Luxembourg. The EFTA Surveillance Authority has its headquarters in Brussels, Belgium (the same location as the headquarters of the European Commission), while the EFTA Court has its headquarters in Luxembourg City (the same location as the headquarters of the European Court of Justice).

Except for Switzerland, the EFTA members are also members of the European Economic Area (EEA). The EEA comprises three member states of the European Free Trade Association (EFTA) and 28 member states of the European Union (EU), including Croatia which is provisionally applying the agreement pending its ratification by all EEA countries.[29][30] It was established on 1 January 1994 following an agreement with the European Community (which had become the EU two months earlier).[31] It allows the EFTA-EEA states to participate in the EU's Internal Market without being members of the EU. They adopt almost all EU legislation related to the single market, except laws on agriculture and fisheries. However, they also contribute to and influence the formation of new EEA relevant policies and legislation at an early stage as part of a formal decision-shaping process.[32] One EFTA member, Switzerland, has not joined the EEA but has a series of bilateral agreements, including a free trade agreement, with the EU.

The following table summarises the various components of EU laws applied in the EFTA countries and their sovereign territories. Some territories of EU member states also have a special status in regard to EU laws applied as is the case with some European microstates.

EFTA has several free trade agreements with non-EU countries as well as declarations on cooperation and joint workgroups to improve trade. Currently, the EFTA States have established preferential trade relations with 24 states and territories, in addition to the 28 member states of the European Union.[40]

A citizen of an EFTA country can live and work in all other EFTA countries and in all EU countries, and a citizen of an EU country can live and work in all EFTA countries (but for voting and working in sensitive fields, such as government / police / military, citizenship is often required, and non-citizens may not have the same rights to welfare and unemployment benefits as citizens).

Since each EFTA and EU country can make its own citizenship laws, dual citizenship is not always possible. Of the EFTA countries, Iceland and Switzerland allow it (in Switzerland, conditions for the naturalization of immigrants vary regionally), but Norway only in exceptional cases, and Liechtenstein only for citizens by descent, but not for foreigners wanting to naturalize.

Some non-EFTA/non-EU countries do not allow dual citizenship either, so immigrants wanting to naturalize must sometimes renounce their old citizenship. See also Multiple citizenship and the nationality laws of the countries in question for more details.

Like EU citizens, EFTA citizens enjoy a high degree of travel freedom. In the "Henley Visa Restrictions Index 2016", the rankings of the EFTA passports were as follows (For details, click on the name of the country):